Web exclusive: Is the Leeds 0% mortgage a gimmick?

Published by Laura Whitcombe on 18 July 2013.
Last updated on 18 July 2013

Leeds BS

The Welcome Mortgage is available as a three- or five-year fix and comes with either a three or six-month 0% rate, depending on the loan-to-value (LTV), up to a maximum 90% LTV and maximum loan amount of £750,000.

Here's how it works. Taking the three-year fix on a loan of up to £500,000 at 85% LTV, there's no interest to pay for six months but then it kicks in at a rate of 4.75% until 30 September 2016. After that point, it reverts to the lender's standard variable rate for the rest of the mortgage term, which is currently 5.69%.

It comes with a booking fee of £199, payable on application, and a redemption fee of another £199. An early redemption fee also applies but 10% annual overpayments are allowed.
Leeds said the 0% period was a way to help homebuyers settle in to their new home by freeing up cashflow for decorating, buying new furniture and making any home improvements.

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But what do the experts think? We asked four property commentators for their opinions.

David Hollingworth

David Hollingworth, associate director of communications for London & Country said: "I think it's always good to have choice and so innovation is a welcome feature. This is aimed at homebuyers that would value a bit of breathing space on their monthly payments in the early months because of all the outgoings associated with buying and moving into a new home.

"Leeds has been careful to price the deals so that there is no additional interest charge over the scheme period than on a standard product from its core mortgage range. That means that borrowers can weigh up the value of the reduced payments against the inevitably higher monthly cost after the first three or six months. Some borrowers might like to use the 0% period to overpay even more as payments will come straight off the capital balance.

"Overall, I like the way that Leeds has structured the deal and avoided charging a premium for the initial interest-free period plus keeping the fee down and offering a free valuation. However, it's always important for borrowers to shop around and see what else is available, looking at the overall cost including fees. Standard deals may offer lower rates and cost overall, so it then becomes a question of what value the zero-rated period holds."

Henry Pryor

Henry Pryor, independent buying agent, said: "There's an old saying in financial markets about there never being something for nothing and here's a great example. In what reeks of being a publicity gimmick the move by one lender to offer a headline grabbing 0% will achieve its aim – but won't make much difference to buyers.

"In fact, what it does best is to remind all borrowers that the rate they have today won't stay at historic lows forever, so plan for rises and in some cases significant rises.

"This offer may be worth noting so that in future so you can tell your grandchildren that you remember having a 0% mortgage when they are accusing your generation of saddling theirs with so much debt."

Andrew Montlake

Andrew Montlake, a director at mortgage broker Coreco, said: "The Leeds product is a good headline grabber and will also assist buyers right when they need to spend money on furniture or decoration for their new home; although overall, there may be cheaper options on a standard fixed rate mortgage. For example Accord's 2.59% three-year fix offered at 80% LTV may more than offset any initial savings on the Leeds 0% for three month product.
"As with all products it is important to get independent advice before jumping in with both feet just because of the 0% glimmer. However, while not suitable for all, these lenders should be applauded for trying to help buyers obtain mortgages with not just a touch of marketing glitz, but some real inventiveness".

Kate Faulkner

Kate Faulkner, managing director of Designs on Property, added: "My real worry is that lenders may say 'don't forget your mortgage will go up to X' but consumers are only hearing the lower introductory amount and not necessarily budgeting for when rates rise, meaning it could be a big shock for them in a few years' time."

What do you think of the Leeds Welcome Mortgage? Have your say by leaving a comment below or emailing editorial@moneywise.co.uk with 'Welcome' in the subject line.

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